Over the past several decades, sustainability initiatives have evolved across industries. They’ve gone from efforts often considered marketing and PR exercises to fundamental strategies that lead to value creation and business resilience. Over that same period, investors began to incorporate physical and transitional climate-related impacts into their risk pricing and capital allocation decisions, and the physical impacts of more frequent extreme weather events have disrupted supply chains and core operations. As a result, the sustainability paradigm has shifted from corporate social responsibility (CSR) to enterprise risk management and resilience.
The evolving sustainability landscape
The transition of sustainability, particularly GHG emissions, from immaterial to material considerations in the business world is well underway. Most businesses already understand that climate change will have a material impact on their long-term growth and operations. As time goes on, these material impacts will continue to intensify, though they will manifest in different ways depending on a company’s business model. For example, in addition to climate change’s direct, physical impact on production processes, brands must consider customers’ desire for more sustainable products and business practices.
Materiality matters: Why sustainability initiatives must be strategic
Standardizing the impact of materiality assessments, which have seen wider adoption in recent years, has helped formalize the climate impacts and sustainability factors most important to business. With new insights and direction from stakeholders, executive leaders have more strategically integrated sustainability initiatives with fundamental business objectives.
Choosing a sustainability initiative with a material, positive impact begins with a deep understanding of your organization’s operations and their effects on the climate and environment. Every company's climate impact will be different, and the choice of sustainability initiatives depends on what would mitigate climate risk while also impacting your bottom line. These initiatives can—and should—be customized to your company and business offerings.
For example, an apparel company may focus its sustainability initiatives on diversifying its supply chain, investing in more sustainable materials, making products more durable, or adopting recycling technology to reduce the amount of waste sent to landfills. A software company would take a different approach, like minimizing server energy waste.
While environmental initiatives generally anchor in core fundamentals of energy efficiency, renewable power procurement, waste management, and non-toxic materials, the specific application of initiatives across those themes will vary based on industry and business operation. Whatever the environmental initiative, leverage deep impact analysis to identify opportunities for improvement.
Choosing the right sustainability initiatives: Deep dive
When assessing risk, companies must consider the entire value chain, including suppliers and physical assets, and scope 1, 2, and 3 greenhouse gas emissions. Diversifying suppliers and investing in processes that reduce or reuse material inputs are examples of where sustainability initiatives can help de-risk operations. Signing PPAs with renewable energy suppliers to lock in long-term supplies and prices mitigates risks associated with volatile energy markets. Johnson & Johnson took that approach one step further by acquiring a privately owned clean energy supplier in the Texas panhandle, which allowed the company to reduce pollution while utilizing a renewable, cheaper energy source. The Johnson & Johnson model is a great case study that highlights how to reduce energy supply risk.
Understanding and addressing risks through sustainability
Undertaking a double materiality assessment can clarify sustainability-related risks and impacts. There are two views to conducting the assessment: the inside-out and outside-in view.
The inside-out or impact-driven view considers your organization’s environmental impact, such as pollution or carbon emissions. The outside-in or financial view identifies the potential financial impact of those same environmental and social criteria on your business’s financial performance. A successful assessment provides a comprehensive overview of your business and informs the most material topics to your core stakeholders and bottom line.
Although many options are available for an organization’s sustainability initiatives, using a strategic approach to identify the ones that fit your organization can be daunting. The Task Force on Climate-related Financial Disclosures (TFCD) framework is one of the best in identifying risks as they relate to climate. The framework divides risk into two categories: transitional and physical.
Transitioning to a lower carbon economy is not without risks: policy risk (e.g., punishment for non-compliance) and the legal risk that could come from having a negative climate impact. When navigating the transition, organizations often also face reputational risk through criticism from stakeholders and the public. Macro impacts from the transition can manifest in technology, as seen in the rise of heat pumps and the decline in natural gas-powered furnaces in homes. Physical risks are more widely understood and can be acute (event-driven, such as wildfires) or chronic (longer-term pattern shifts, such as sea level rise).
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The power of focusing on materiality: The Patagonia example
Sustainability initiatives don’t have to address every topic identified through a double materiality assessment all at once. Patagonia is an excellent example of beginning with narrowly focused initiatives and expanding them gradually. While founded on ideals of sustainability, one of Patagonia’s major initiatives that caught public attention was its effort to scale up its clothing repair and recycling capabilities through its “Don’t buy this jacket” marketing campaign in 2011. Based on released reports, the initiative repaired more than 30,000 items in 18 months, and Patagonia saw sales increase by 30% to $540 million in the following year.
Since then, Patagonia’s initiatives have only grown in size and ambition, and the brand has become a staple for people who love the outdoors and care about the environment. The company has increased its use of preferred materials (organic and regenerative organic cotton, hemp, recycled polyester, and recycled nylon, for example) from 43% across the whole product line in 2016 to 88% in 2022. It has cofounded or joined numerous progressive coalitions to change the apparel industry, including the Fair Labor Association, the Sustainable Apparel Coalition, and B Lab. Its ambitious sustainability goals reaffirm a commitment to reducing its overall carbon footprint—the company aims to eliminate virgin petroleum material in all products and have 100% reusable, home-compostable, renewable, or easily recyclable packaging by 2025. By 2040, Patagonia aims to be net-zero across its entire business.
When grounded in materiality and the double bottom line, creating and executing sustainability initiatives is an exercise in risk mitigation and value creation. The most successful initiatives transcend the achievement of sustainability progress to become pillars of business operations and growth strategies. Getting your sustainability initiatives right can take time and effort, but it is a worthy investment in long-term success.
Sources
1. Bloomberg, “Johnson & Johnson Buying 100 Megawatts of Texas Wind Power,” https://www.bloomberg.com/news/articles/2016-09-16/johnson-johnson-buying-100-megawatts-of-texas-wind-power
2. Patagonia, “Don’t Buy This Jacket, Black Friday and the New York Times,” https://www.patagonia.com/stories/dont-buy-this-jacket-black-friday-and-the-new-york-times/story-18615.html
3. Patagonia, “Our Environmental Responsibility Programs,” https://www.patagonia.com/our-responsibility-programs.html
