New Research: Return on Investments in Sustainability
This summer, the IGP team conducted a research project at the request of a prominent investment firm to investigate whether pursuing a sustainable business strategy can lead to enhanced profitability. This question is top of mind for companies charting their path to meeting B Lab’s new standards. While money invested in sustainability does not lead to positive short term returns in all cases, we utilized a competitive strategy framework to demonstrate that a wide range of companies can utilize sustainability to augment their competitiveness regardless of the competitive strategy that they adopt. We examined the three most common competitive strategies identified in academic literature to demonstrate that sustainability can improve financial outcomes in a wide variety of business environments.
Cost Leadership
Under the cost leadership approach, firms aim to gain competitive advantage through narrow margins and low costs. Companies adopting this approach can benefit from the efficiency gains resulting from investments in sustainability. For example, Walmart made significant investments in solar energy, LED lighting, and efficient trucking which has led to a significant reduction in CO2 emissions, as well as hundreds of millions of dollars in reduced costs.
Differentiation
The differentiation approach emphasizes the benefits of standing out from the competition in crowded markets. By emphasizing sustainability efforts, firms utilizing this approach can differentiate themselves from competitors. Companies such as Patagonia have benefited from sustainability as a way to differentiate from the competitive outdoor apparel industry.
Focus
The focus strategy relies on targeting a narrow but passionate segment of the market. Firms adopting the focus strategy can target customers that care deeply about environmental issues with heightened willingness to pay for sustainable products. Companies like Cotopaxi have benefited from this by reusing scraps of material to create multicolored garments and bags that stand out. Cotopaxi has become popular among young, outdoorsy consumers who value uniqueness and sustainability.
For more details about how sustainability can be used to enhance profitability or deepen your relationship with consumers, check out the full presentation including links to all sources referenced.