Sustainability has become a critical factor in today’s business market. Over 4,500 companies worldwide are collaborating with the Science Based Initiative to assess, monitor, and reduce their carbon emissions. However, despite 90% of executives acknowledging the significance of sustainability, only 60% have implemented a sustainability strategy, according to a study by MIT Sloan Management Review.
The growth of data traffic is expected to increase eightfold by 2030, according to BT & Accenture, which could have a substantial carbon footprint depending on the energy source fueling that data. This is a concern for companies that have yet to establish a sustainability strategy, as well as those with ambitious net-zero emission targets.
The current situation is a critical turning point, and it’s important to question what companies stand to lose by failing to establish and execute effective sustainability strategies in relation to their digital footprint.
Companies that fail to develop or execute robust sustainability plans risk facing significant and lasting challenges. As the head of sustainability at BT, a telecoms company with almost 100,000 employees, I have seen firsthand the impact of this risk.
There are three major challenges a company may face if it does not have a proper sustainability plan in place.
- Global sustainability regulations and carbon taxes: Governments worldwide are introducing sustainability laws and regulations, and failure to comply with them could become a financial liability for companies. For example, in the European Union, the Corporate Sustainability Reporting Document (CSRD) aims to increase transparency and consistency in sustainability reporting by businesses. Companies with over 500 employees will be required to disclose various sustainability-related information.
In the United Kingdom, mandatory climate-related financial disclosures have been introduced, and the US Securities and Exchange Commission is in the process of finalizing climate disclosure regulations similar to the CSRD that will affect most companies.
Carbon taxes are also becoming more prevalent, where governments charge a fee based on the amount of greenhouse gas a company emits. As per the financial and tax website GCC FinTax, 27 countries have currently implemented carbon taxes, including Japan, the EU, the UK, and Mexico, with more countries expecting to pass similar laws. In December 2022, the EU introduced the Carbon Border Adjustment Mechanism (CBAM), the first of its kind, to impose a fair price on the carbon emissions produced during the production of carbon-intensive goods entering the EU.
- Brand and reputation risks: Companies that are not seen to be taking adequate steps to mitigate their environmental impact may face damage to their brand reputation, leading to a loss of customer trust and revenue.
- Operational inefficiencies and missed opportunities: Failure to incorporate sustainability into business practices may lead to missed opportunities for innovation and cost-saving measures. It can also result in operational inefficiencies that can have long-term financial consequences.
Companies that fail to develop and implement sustainability strategies not only face financial risk but also reputational risks. Stakeholders, including investors and consumers, are increasingly concerned about sustainability, and companies that are not perceived to be following suit can lose trust, which can lead to decreased sales, loss of market share, and negative publicity.
According to a study by Gartner, 85 percent of investors are using environmental, social, and governance (ESG) metrics to inform their decisions on which organizations to invest in. Companies that are perceived to be lagging on sustainability are seen as high-risk holdings, which will impact their ability to raise capital. Furthermore, a 2021 study of 10,000 people across 17 countries found that “sustainability is becoming increasingly important in consumers’ purchasing decisions.”
Consumers are increasingly aligning themselves with companies they perceive to be green, and losing their consumer base could have significant implications for companies. A similar study conducted by Accenture in 2020 found that 60 percent of consumers are making more environmentally, sustainable, or ethical purchases.
The pattern is also nearly identical for employees, with a study by IBM showing that 67 percent of their 10,000 respondents reported that they would be more willing to apply and accept jobs from environmentally sustainable companies. In some cases, talented employees have even left companies that are perceived to be less sustainable, even taking a pay cut to work for their competitors.
In the past few years, the global supply chain has experienced significant changes, including a global pandemic, the Ukraine-Russia conflict, rising inflation, and an anticipated recession. Market volatility, like what we have witnessed over the last three years, can negatively affect a company’s ability to function effectively and minimize risks. As a result, business leaders have focused more on surviving the market rather than emphasizing sustainability.
Climate change has resulted in a rise in the number and severity of natural disasters, such as hurricanes, fires, and extreme weather, which further affect the supply chain. Such disruptions increase prices and lower profits simultaneously. The 2011 Japan earthquake tsunami resulted in $210 billion in costs for Japan, according to data. When Hurricane Maria hit Puerto Rico, which houses a significant production of pharmaceuticals and medical equipment, the United States suffered similar consequences, with American hospitals losing their saline supply and resorting to rationing saline.
The issue is that failing to invest in sustainability could lead to increased business expenses in the long run. Shifting to net-zero emissions can help businesses save money. Combatting climate change by focusing on net-zero emissions is critical and can also reduce market volatility. Businesses that prioritize net-zero emissions have been shown to benefit from an increase in their reputation, cost savings, and protection from over-reliance on fluctuating fossil fuel-based energy supplies, according to the British Business Bank.
Taking steps to address sustainability concerns is crucial for companies, given the increasing number of sustainability regulations, financial risks, and volatile supply chains. The first step towards sustainability is recognizing these challenges. The next step involves developing a comprehensive strategy to combat them, which should include assessing your company’s digital footprint and finding effective ways to reduce carbon emissions throughout the organization.
To stay ahead of the curve, companies must act proactively as we move into midyear 2023. Reactive responses to threats and external factors will only delay the inevitable. Sustainability can no longer be treated as an optional extra or a mere box-ticking exercise. Instead, companies must prioritize it and develop a strategy that positions them as leaders in the drive for sustainability success.