Mapping out a sustainable future is crucial for all businesses. But it isn’t always clear how to do this without sacrificing profit
In his book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, former Morgan Stanley banker turned Professor of Finance Alex Edmans addresses how businesses can work towards sustainable models and be profitable at the same time. We sat down with Professor Edmans and Imperial College Business School’s Professor Franklin Allen to discuss how organisations can achieve effective sustainability in business.
What advice would you offer to business leaders who are struggling to combine profit and purpose?
AE: People tend to think that the value a business creates is a fixed pie and anything that you give to society is at the expense of profit. But what I’d like to make clear is that purpose and profit are intertwined.
The goal of academic research is to show that win-wins, which might sound like wishful thinking, are possible. However, it is important that business leaders are discerning: there are certain moves that pay off in terms of long-term profitability, but not all do.
How damaging is greenwashing to the wider sustainability message, and what can be done to limit its impact?
AE: Greenwashing is damaging in many ways. It means that companies can say they’re taking action without putting it into practice, leading to a big backlash against sustainability in general. Ex-BlackRock Executive Tariq Fancy has spoken out against green investing, but his criticism is too extreme. Rather than statements such as "sustainability always works" or "sustainability is a complete ruse", we should focus on the evidence.
FA: Greenwashing is down to a problem with the way green bonds are structured. Somebody has to certify that green bonds are being used to support specific climate-related or environmental projects, however there’s a big issue around what counts as green, as well as whether the company uses the bonds to work on these projects after they’ve been certified.
But there’s another way: contingent green bonds make the pay off on the bonds contingent on acting to improve climate change. This is a technical solution to the problem of greenwashing that hasn’t been widely publicised.
Which companies have a successful, sustainable business model?
AE: Unilever is an often-cited example. When Paul Polman took over, he said that the company would ensure that it was a sustainable business, and its purpose was to make sustainable living commonplace.
People were skeptical, but when Unilever showed that the sustainable living brands were growing faster than the other brands, this highlighted that there is a business case for purpose, not just a moral case. This correlation between success and sustainability got people really excited.
A second thing is the importance of long-term horizons. In the short term, anything you do to serve society is going to mean sacrificing profits, but in the long term there are win-wins. Polman’s own pay scheme means that when he retired, he still had to keep a lot of his wealth in the company.
FA: Tesla’s electric car is now worth the next 10 car companies combined. This is a good example of a company doing something with purpose, while also making a huge amount of money.
What can employees do to promote positive change within their organisation?
AE: Employees have a lot of power and many companies have changed how they do business as a result of their staff. For example, the New Belgium Brewing Company has eliminated cardboard from its packaging because employees, who were close to the action, suggested it wasn’t necessary.
FA: I agree with Alex – there are many things employees can do, which are difficult for those at the top of the organisation to achieve. I think the switch to working from home is a good example of that: before COVID-19, I don’t think many people thought people in office roles could be based at home, arguing that employees wouldn’t be working seriously, but it seems clear that it works very well.
What three things would you advise people to change about how, and what, they consume?
AE: The first thing to think about is whether you need to consume as much as you do. For example, do you need to buy new clothes? As an example, my wife decided to rent maternity wear. Similarly, when you do buy things, you can factor the sustainability of the item into your decision-making process.
There’s also an increasing number of apps that help empower the consumer by allowing them to look up a company’s values before buying their products.
How optimistic do you feel about society’s ability to change business for the better?
AE: I’m moderately optimistic. This is now a major issue that interests people across the business world who realise that in today's world, you need to think about purpose.
However, people claim in order to implement purpose, you need to overhaul the system by restricting shareholder rights and changing company law. Again, extreme statements are likely to attract the most attention, but such remedies aren’t backed up by the data. I focus on remedies that can be implemented within the current system. I think we need regulation, carbon taxes, action from companies themselves and employees, but we need to work together, rather than say it’s entirely down to companies or regulators.
FA: I’m somewhat more optimistic than Alex. One of things that has surprised me most is the extent of ESG financing mandates. In Europe, I have heard the statistic that 75 per cent of investment mandates have an ESG component, in the US it’s less but growing fast. That’s an example of people wanting to do the right thing, and I think that’s a potentially extremely powerful way of improving things.