Finance

Creating a sustainable strategy for sustainability efforts

Sustainability is very much in vogue today. Almost nine in 10 customers say they would consider buying a product because of a company's sustainability efforts, but these same customers had no confidence in companies being sustainable for the right reasons.

The end-result is that customers buy sustainable products only 22 percent of the time, even when they say they want to.

Gigantic disconnects exists between customers, companies and countries on how to be sustainable and even why. Somehow sustainability has become a multi-level political issue.

Many people think that companies engage in sustainability initiatives just for reputation management. Of course, some companies strive to create a warm glow among customers by doing good - stressing philanthropic sustainability over sustainability as a competitive value in the products they sell. 

This mentality is also creeping into politics and capturing voters' attention. Republicans argue that environmental restrictions dilute the country's competitiveness. Democrats argue that value for the good of the macro environment overrides value for shareholders.

Interestingly, just before the last U.S. presidential election, the United Nations and its 193 member countries doubled down on sustainability by ratifying the Sustainable Development Goals, an expansion of the Millennium Goals. So, global sustainability did not really have a chance to be front-and-center in the 2016 election. 

But, with the U.S. removing itself from the Paris climate deal, many countries are wondering how they can have a measurable sustainability impact. Can the globe really be sustainable without the U.S. participating actively? How will this affect the 2018 U.S. elections?

In response, many U.S. companies are engaging altruistically in sustainability initiatives - often under the auspices of corporate social responsibility programs. But, what has long been unclear from a more practical business perspective is how high the cost can be for sustainability efforts?

Everyone realizes that sustainable products that are too costly only will be purchased by a limited set of customers. The flipside is that more customers will presumably buy sustainable products if prices are contained in such a way to not lessen the product's quality.

Some guidance here can be offered using the United Nations' Sustainable Development Goals. The results of a study I participated in, involving 4,051 companies in 10 countries, suggest that a company can achieve satisfactory performance even when costs and/or product prices increase by 27 to 72 percent.

Variations naturally exist across industries, and what is truly satisfactory is a matter of shareholders' viewpoints or, as it may be, politicians' election arguments. 

It is also helpful to know that beyond the United Nations' infrastructure push, a company can implement sustainability efforts that are 5- to 30-percent above the sustainability efforts provided by their home country and perform satisfactorily. This is important since most countries are far from achieving the United Nations 2030 goals.

Ultimately, the sustainability solution lies in politics. Many countries realize the planet's benefits from being sustainable but cannot effectively connect this understanding to policy that is successfully embedded in marketplace forces.

Instead, the easiest thing for politicians is to either argue that too much regulation hurts the country's competitiveness or too little regulation hurts the environment. Neither is a viable, long-term viewpoint, but both are effective at securing votes in the short term.

It would be better to compose a coherent sustainability strategy that integrates government policy (countries), marketplace forces (companies) and people's needs and wants (customers). We have a starting point of a 27- to 72-percent increase in manufacturing costs and/or product prices as the wiggle room for such sustainability success.

It's the all-encompassing, across-the-board regulations, in either direction (to few or too many sustainability constraints), that become too political to be effective. But this middle-of-the-ground view is often hard to sell to enthusiastic voters.

Tomas Hult is professor in the Broad College of Business at Michigan State University and executive director of the Academy of International Business. In 2016, Hult was selected as the Academy of Marketing Science Distinguished Marketing Educator, as the top marketing professor worldwide for scholarly career achievements.

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