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Sustainability initiatives have a short-term ROI problem

Sustainability initiatives are viewed as profit killers partially because how to measure success of projects pushing beyond a financial return on investment is still being decided.

Sustainability initiatives are sometimes seen as costly and not profitable. But those perceptions might be myths driven by how companies frame the discussion and measure their success, according to a recently released report from Accenture and the World Economic Forum.

Organizations often evaluate sustainability initiatives through a financial lens only. Their efforts tend to be bolted on in pockets of the organization rather than built into processes across the organization.

Accenture's research with the WEF looked to investigate some of the myths around sustainability efforts in business, such as the idea that these initiatives are a zero-sum game where an organization can either be profitable or sustainable but not both, said Debbie McCormack, global board effectiveness and sustainability lead at Accenture.

Accenture worked with 140 members from WEF's Young Global Leaders and Global Shapers -- two groups made up of leaders under age 45 who typically run business units or head startups -- to examine the sustainability perceptions. It then tested these findings against the views of 280 senior executives from large global companies.

One concept derived from the research is clear: Building sustainable companies won't happen overnight, and companies need to give initiatives time to deliver on an ROI.

Business evaluation needs to move beyond the short-term

The report, released in June, indicated an awareness by business leaders that sustainability needs to be addressed. But instead of ripping up traditional business cases that emphasize short-term ROI, they should design them to meet new long-term goals. These initiatives need to dovetail with other long-term goals, such as transitioning to a digital core centered on the cloud that incorporates new technologies like data analytics, digital twins, AR and smart contracts.

The business case also needs to evolve so that companies consider the financial as well as the sustainable implications to doing business, McCormack said. That means shifting mindsets away from short-term financial performance to the long-term competitive advantage sustainability may be able to provide.

"Stakeholders need to look at it not only on financial performance but also on sustainability impact, which they're starting to do," she said. "It's about extending the horizons and giving sustainability enough time to be impactful for the long-term view for success to scale."

The challenges in making this transition a reality should not be underestimated, McCormack said. But neither should the potential outcome.

"Making the case can be challenging," she said. "But from a technology and talent standpoint, companies that don't invest to move forward on this -- going to cloud, leveraging the new gen AI, knowing what data they have and need -- will find themselves in difficult positions if their competitors are making these changes."

Implementation of new sustainability metrics not easy

The Accenture-WEF sustainability report indicates promising news for sustainability gains, but they should be taken with a grain of salt, according to Craig Wentworth, an analyst at TechMarketView.

To reframe the perception of sustainability, the Accenture-WEF report proposes that companies move away from nebulous, generic benefits to more human-centric and relatable benefits, Wentworth said.

Doing so means extending the timeframe for an expected ROI and changing the way that a company's performance is measured to include social and environmental benefits, he said. However, while laudable, this approach is problematic to implement.

"It's really hard to wean companies off measuring and evaluating the value of things in financial language and short-term windows," Wentworth said. "Even if regulators push for more non-financial metric disclosures, those financial metrics are still going to be the ones on most investors' minds -- for now."

The more market education that goes into persuading organizations to play a longer and differently oriented sustainability game, the better, he said. For now, sustainability projects need to find ways to operate in a financially driven environment and justify their cases in the short and medium terms, he added.

"Sustainability projects need to get better at dealing with the business world they're in now -- not the one they might prefer to inhabit," Wentworth said. "And they need to get better at tying their metrics into financial and traditional operational ones and expressing their worth in CFO-friendly terms."

Sustainable companies perform better

Another flawed perception may be the idea that sustainability is a cost. Research such as the Accenture-WEF report and another from Everest Group indicate that companies that invest in sustainability initiatives perform better on financial and operational metrics, according to Nitish Mittal, partner and technology practice leader at Everest Group.

Customers want to buy from, employees want to work for and suppliers want to partner with environmentally responsible companies, according to Mittal.

"So there are customer benefits, there are employee talent benefits and also partner benefits to being more sustainable, which organizations are realizing now," he said.

That's the positive outlook of sustainability. But the reality check could be the overall health of the economy, Mittal said. It remains to be seen if customers will be willing to pay a premium for sustainable products in an inflationary environment or if there's a cost-of-living crisis.

Sustainability is a strategic investment

Some more evidence suggests that business leaders are taking sustainability more seriously and are investing in initiatives.

In a new survey from Stem and Wakefield Research, 100 C-suite leaders from Fortune 1,000 companies reported sustainability to be an important strategic and forward-thinking investment. Stem is an energy storage products and services vendor in San Francisco.

According to the report, 57% of respondents see sustainability as a key to long-term business success and are increasing investment despite economic challenges. The main drivers for the investments are investor demand (40%) and new revenue potential (39%).

Stakeholders need to look at it not only on financial performance but also on sustainability impact. It's about extending the horizons and giving sustainability enough time to be impactful for the long-term view for success to scale.
Debbie McCormackGlobal board effectiveness and sustainability lead, Accenture

Most survey respondents also indicated their businesses are being negatively affected by energy challenges and are now top of mind, indicating a change for executives, according to Larsh Johnson, Stem's CTO.

"For a long time, it was in the background. But now it's becoming more forefront with the energy price issues, resiliency questions and sustainability initiatives," Johnson said.

There have previously been questions about macroeconomic conditions and if sustainability investments can be justified. But Johnson said the survey shows investing in energy saving technologies can pay off.

"What we found -- which was maybe not surprising to those of us who've been in the business -- is that 40% of the executives felt like this was not a cost issue. It was a margin-enhancing opportunity," he said.

The Stem report highlighted the fact that technologies are being deployed across different uses cases in the energy sector to foster sustainability goals, including energy generation, supply and storage, according to Wentworth.

Hype around AI and other new technologies and the thinking that they will prevent climate catastrophe may complicate sustainability endeavors, he said. But that perspective is myopic.

"[New technology] can certainly help in many areas. But there are also important contributions that less new, fancy and flashy tech can make -- not to mention the need to change policies, practice and peoples' mindsets," Wentworth said. "New tech products alone are only part of the overall story."

Jim O'Donnell is a senior news writer who covers ERP and other enterprise applications for TechTarget Editorial.

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